Image by Freepik
To the average investor, venture capital and tech investment can seem frustrating. The lore of massive gains made on early investments in tech companies from Apple to Uber is enough to pique any investor’s interest, but the VC space has a certain air of inaccessibility, dominated by a relatively small number of top firms with access to investing in private companies before an initial public offering. Fundrise’s “Innovation Fund,” a tech investment fund with a direct-to-investor fintech approach, is looking to change that.
On the Fundrise podcast “Onward,” CEO Ben Miller said, “Typically, venture investors raise their money from institutions. Those are endowments, pension funds, and family offices.” Fundrise is the largest direct-to-consumer alternative asset manager in the U.S. and the company behind the new fund.
“To date, there’s never been a venture fund that raises money from tens of thousands or hundreds of thousands of individuals,” Miller added. “We’re unique in that. We’re going to be democratizing investing into venture.”
On the podcast, Miller explained the Innovation Fund and traced the history of VC, noting some of the strengths and weaknesses of its current state, and delineated the key differences between standard VC and his new fund when it comes to tech investment.
What Is the Fundrise Innovation Fund?
The Fundrise Innovation Fund is a venture fund that’s open to individual investors and designed to primarily focus on investing in high-growth private technology companies.
Traditionally, nascent tech sectors — for example, artificial intelligence and machine learning — have been largely off-limits to individual investors, primarily benefiting VC and growth equity firms. According to Miller, the Innovation Fund aims to level the playing field by offering all investors the chance to participate in a portfolio of top-tier private technology companies before they go public.
While the focus is primarily on late-stage, pre-IPO companies, the fund is designed to be “multistage,” meaning it will also invest in early-stage startup companies and hold some public equities. Its current holdings include established giants like Uber, as well as less widely-known, privately held software companies like ServiceTitan, Inspectify, and Vanta.
Fundrise launched the fund amid a shift in the behavior of tech companies. Unlike in the 1990s and early 2000s, when companies like Amazon and Google went public relatively quickly, today’s high-growth technology companies stay private for much longer — on average, around a decade longer.
This extended period of staying private means that individual investors, who are generally confined to public markets, could miss out on the returns generated by the next generation of industry leaders in sectors like AI, data infrastructure, and fintech.
Miller described the long-term strategy of the fund as “evergreen.” It’s focused on long-term growth and avoiding selling positions in companies that could turn out to be much more profitable down the line. He distinguished this approach from large VC firms that are beholden to institutional investors and rewarded for taking short-term risks and gains.
“Our investors and I would rather have a good return for a long time than a great return for a short time,” he said. “If you look at the compounding benefits of high returns, it’s way better to stay in.”
He referred to an example of VC firm Sequoia’s early investment approach.
“They actually invested in Apple when they were starting. And right before they went public, Sequoia sold all their shares in Apple for six times their money. It was really good for that fund to show they could raise their next fund six times. But If they’d held it, they would’ve made 24,000 times.”
Like a VC, the Innovation Fund focuses on targeting pre-IPO companies with the potential for significant growth based on their tech and business models. Still, Miller argues that the VC industry has lost touch with a focus on product.
“It’s not a product-first industry, it’s a finance-first industry.”
There’s been a shift toward momentum investing, in which, rather than seek out new and innovative companies, large VC firms fight for the opportunity to invest in companies that have already shown signs of success or that have received backing from other prominent investors.
This creates a cycle where the same few companies receive the majority of available funding, often leading to inflated valuations and setting the stage for investment bubbles.
“It wasn’t about finding the diamond in the rough, finding the musician at the music bar that no one knew about. It was about momentum investing, and that became a bubble,” explained Miller.
He differentiated this approach from Fundrise’s, arguing that, as a tech company, it has a valuable perspective on the industry and the products it builds.
“We are using technology to do venture investing. Because we build products, we’re product people, we have interesting ideas of how to use technology,” he said.
“And of the 2000 venture funds in the country, I would bet you not a single venture fund has a product engineering department, which we do. We have 100 engineers on our team. We have cloud and data infrastructure, we have payment processing, we have [application programming interfaces], analytics, cybersecurity.
“We know about how to scale a company, we know about unit economics, basically essential [business-to-consumer] execution. So we have a lot of depth on the technology side, [which] I think is very useful when we think about how we can look at and connect with great tech companies.”
Democratized Structure and Incentives
The Fundrise Innovation Fund also diverges from the standard “2 and 20” fee structure of a VC, which typically charge 2% annual asset management fees and take 20% of an investment’s profits.
“Our fund has no 20% carried interest. It doesn’t take any share of the upside,” Miller explained. The rationale behind this approach, he noted, is the belief that “if you’re going to get 20% of the upside, then you should pay 20% of the downside. If you’re not going to pay 20% of the downside, then you don’t deserve 20% of the upside.
“That’s just not right. And it creates skewed incentives. It’s a risk on incentive, right? You get paid to take risks, and you don’t get paid not to take risks.”
This more risk-averse philosophy is tied to the fund’s strategy of catering to individual investors with long-term goals, a fundamental structural difference from a standard VC.
“Having 350,000 investors and 1.6 million users is very, very different from a venture fund that might have 20 institutional investors,” said Miller.